Friday, February 27, 2015

The first large U.S. bank failure in five years occurred tonight when regulators in Puerto Rico closed Doral Bank. It had $4.1 billion in deposits and $5.9 billion in assets as of the end of the year. Banco Popular assumed responsibility for the deposits in an agreement with the FDIC, but the arrangement is not as simple as that. Banco Popular is keeping only 8 of Doral Bank’s branches in Puerto Rico, along with three in New York City. FirstBank Puerto Rico is purchasing the other 10 branches in Puerto Rico. Arkansas-based Centennial Bank is purchasing the five branches located in the western Florida panhandle. Banco Popular is purchasing around half of the assets. The FDIC says it has buyers for another $1.3 billion in assets and will seek buyers for the rest. The complexity of the arrangements makes this one of the most involved bank resolutions to date. Adding to the confusion, the FDIC erroneously announced the bank failure during the day while the stock market was still open. It was an uncharacteristic error from the usually very cautious FDIC, and may perhaps be explained by the one-hour time zone difference between Puerto Rico and the U.S. east coast. The FDIC retracted the report, then reissued it at the end of the day, but the damage had been done, and trading in the bank’s stock was halted after it fell by half in less than ten minutes. The bank failure will cost the FDIC about $750 million.

Doral Bank had been struggling for years and suffered a major setback on Wednesday when an appeals court ruled against it in a $229 million tax case. The FDIC will now file an appeal of that ruling on behalf of the bank. A former officer of the bank was one of several people indicted earlier in the week in a fraud case. The FBI was separately investigating the assassination of a bank executive in 2011.

An HSBC executive admitted to hiding $8 million in bonuses in a Swiss bank account in the name of a company registered in Panama, in part to avoid paying U.K. income taxes on the money. In other testimony, executives acknowledged the difficulties of managing such a large instituation and the extent of reputational damage the bank has suffered as a consequence of its unethical behavior.

HSBC may face a new inquiry in Austria next week after banking authorities there get copies of bank operating documents from authorities in other countries.

U.S. banking profits were stronger in the 4th quarter of 2014, with about two thirds of banks reporting improved profitability. A few of the largest banks suffered profit declines, but those were mostly attributed to legal costs.

Deposit flight in Greece reversed after the details of a bailout extension emerged. The episode demonstrates the way bailouts protect financial institutions at a cost to the broader economy.

In hearings this week, executives of CIT Bank tried to reassure the public that the bank would be made stronger, not weaker, by the proposed acquisition of California’s OneWest Bank.

Thursday, February 26, 2015

Another earnings season is winding down on Wall Street, and revenue numbers seem to be declining broadly among corporations that mainly support the corporate sector. Some of this is just an improvement in efficiency in one way or another — for example, with computers lasting longer, it is harder to sell new computers to corporations — but some of it must be a sign of the corporate sector in retreat. It has always been the case that the established part of the large corporate sector tends to shrink over time, and this has been going faster since the 1980s. Now we are seeing a period in which the up-and-coming large corporations aren’t growing fast enough to cover the decline in the older, established large corporations.

In theory, the “flat” world economy that we talked about so much a decade ago should enable more effective competition from newer and smaller players, and perhaps that is what we are starting to see now.

Wednesday, February 25, 2015

People are asking why there are so many data breaches now, but the question holds a hidden assumption. In truth, we don’t have good systematic knowledge of the data breaches that occur, so we can’t really say how many there were in the past or are now. With most of the events undetectable, it is impossible to say anything with any statistical confidence about what the trend is.

It is worth considering, though, that one reason data breaches are reported is that business are able to detect them. There is more technology and more skill when it comes to monitoring computer networks than there was in years past. Of course, that didn’t help Target a year ago when it detected intruding software in its retail network and ignored the finding. However, there is also more skill in detecting patterns in transactions and other events, and that capacity came to Target’s rescue two weeks later. We can even say with confidence that there are criminal groups trying to cover their tracks by keeping their exploits on a scale too small to be noticed. This tendency to keep things small is itself a pattern and any such pattern stands a small but significant chance of detection no matter how small and pseudorandom a criminal enterprise makes its activities.

In theory, the growing risk of detection would eventually deter criminals. In practice, there will always be criminals who are not rational enough to accurately measure the risks they are taking. On the other side of the data breach, the same quality can be found in businesses, which rarely consider the risk of data loss with the seriousness it deserves until after a loss has occurred. Put the two together, and it is easy to say that there will continue to be data breaches, and they will continue to be detected.

Monday, February 23, 2015

Procter & Gamble is a sprawling empire of more than 100 consumers with nothing to tie them together beyond the company’s skill at getting consistent results with chemicals. We heard last year that the company had realized this was too much, and then there were deals to sell off the Duracell battery division and some others. The latest word is that the retreat goes deeper than that, and we can expect it to sell off half of its brands accounting for perhaps one fifth of its revenue within a few months. The result, the company hopes, is a more manageable operation.

P&G will still be a long way from the classic industrial model of one company selling one brand, but in theory, eliminating the brands that are least connected to the company’s sense of purpose should make it more coherent and therefore more manageable. There is reason to doubt that this restructuring is going quite that way, as the company is also trying to keep its big-money consumer brands, but it still must be a step in the right direction.

Friday, February 20, 2015

HSBC issued a full-page Sunday newspaper apology for its shady practices, but the apology was hardly convincing. The tone of the executive letter fell somewhere on the spectrum between unrepentant and defiant, and the aggressive stance will come back to bite the bank the moment that more recent evidence comes to light. We might not have to wait long for that to happen, as Swiss law enforcement spent the day Wednesday inside HSBC’s Geneva office collecting records related to specific transactions.

Tax authorities in the United States, United Kingdom, and elsewhere are pursuing other threads in the case. Meanwhile, the scandal continues to spread with compelling links to high-profile big-money problems in Brazil, Russia, and Mexico. One London newspaper counts ten separate investigations launched since last week. Another, the Telegraph, has lost a prominent writer, who quit in response to its publishers’ ongoing role in the coverup. The paper’s statement in defense of its non-coverage is more aggressive than that of the bank itself, if that is possible, and has been ridiculed as a conspiracy theory and as having possibly been written by the bank’s PR department. Adding to the sense of scandal, two of the newspaper’s owners are said to have received an unusually large and seemingly irregular loan from the bank in the days before the non-coverage decision was sent down. Officials elsewhere, from the British prime minister to U.S. prosecutors, have been forced to join the chorus of denial, claiming they did not know basic facts of the case that were in documents they seemingly had possession of.

Greece formally applied for a six-month extension of its bailout. The plan met resistance from Germany, which wanted a deal for three years or longer. Some commentators thought the situation would set up a Greek exit from the euro, while others expected Wall Street to come to the rescue. There was some deposit flight from banks with worry about solvency if there were any delay in the government’s debt payments. The deal that is expected to be finalized this weekend is a four-month extension with Greece following the general outline of its austerity regime. This must be a disappointment to the new government in Greece, but it buys possibly enough time to get its house in order.

Royal Bank of Scotland might have to write down £4 billion in goodwill in connection with the spinoff of U.S.-based Citizens Bank. If so, it is a sign that RBS overpaid when it bought Citizens Bank.

Wall Street Journal says next month’s U.S. stress test results will show failing marks for Santander and Deutsche Bank, not for capital shortfalls, but for operational shortcomings. Santander failed last year’s stress test.

Thursday, February 19, 2015

It isn’t exactly a tight job market, not yet, but employers are already having to adjust. Walmart announced it is raising its pay for its lowest-paid workers by about $2 an hour over the next year. It is also trying to make work schedules more predictable and posting them farther in advance so that workers can have an easier time planning their lives. Both moves echo adjustments already made last year by other retailers.

It is a different adjustment for employers of information technology workers. Companies are increasing pay, and much of that increase is going into retention incentives.

The press releases may talk about lofty goals such as creating a better experience for workers, but the real objective is to reduce turnover. Workers in 2015 have more options than they have had since 1998, and companies worry that if they don’t give workers a reason to stay, they may find themselves without enough workers to operate effectively.

Wednesday, February 18, 2015

Granite Run Mall might be seen as the least successful regional mall in southeastern Pennsylvania. At last count, it was about 20 percent occupied. The solution is not a marketing plan to boost business in the mall, but to tear down the mall. It is a tricky process for everyone involved, from the demolition workers to the shoppers, as about five stores are set to stay open while the mall is taken away. The plan is described in this recent story in Daily Local News:

This is one of the biggest suburban redevelopment projects I have heard of in this area, so I will try to keep up with its progress and see how it goes. Nationally, many malls have closed and been demolished or, in some cases, converted to other purposes. The Granite Run project is unusual in keeping parts of the retail space operating while rebuilding most of the space to allow for other uses.

Tuesday, February 17, 2015

A new study of cigarette packaging finds that the shape and decoration of the cigarette pack can be part of an addictive pattern. Standardized packaging can interrupt this part of the pattern. It has been found to reduce the number of cigarettes smoked by smokers, affecting both those who are trying to quit and those who intend to keep smoking. Importantly, the study suggests that plain packaging is more effective at interrupting the smoking impulse than packaging that contains colorful health warnings. James Gallagher reports on this study at BBC News:

Sunday, February 15, 2015

After the busy January weekends at retail in my local area, today the commercial neighborhoods looked like a ghost town. Some stores closed early so workers could get home before dark. It was cold weather that kept people home. Temperatures around 11°F were just cold enough to persuade people that they shouldn’t be outside. I know there are places where 11°F temperatures are considered normal, but in southern Pennsylvania, weather this cold is rare enough that we don’t have much knowledge of it. Avoidance is probably the most practical response.

If people weren’t out shopping, what were they doing? I spoke to a few people who were working on their taxes, with the deadlines more than a month away. This is perhaps another sign of easing time pressure. Consumer time pressure had been going up for so long, 30 years at least, than it seemed it would just continue to go up indefinitely, but it now seems we are starting to see a reversal of that trend.

Friday, February 13, 2015

There is hardly anything in the internal HSBC documents that leaked to the press from multiple sources this week that will shock anyone who has worked in high finance. A financial institution under pressure and its regulators will become willing to tolerate essentially any transgression by its employees and customers. Tax evasion, bribery, nepotism, smuggling, sexual assault, armed insurrection — it almost doesn’t matter what it is because it officially doesn’t exist if word never gets out.

What makes the HSBC case different is how pervasive the culture of corruption seemed to be and how many regulators knew and took no action. Indeed, one of the figures at the center of the HSBC scandal was appointed to a high government position in what looks like an attempt to help the bank use the power of government to cover up its problems.

Of course, this fell apart with this week’s revelations. Its reputation is so shaken, institutional continuity at HSBC seems to be at risk. Someone in charge has to take the blame.

The new government in Greece is moving forward with reforms after a parliamentary vote of confidence.

The specter of bank failure returned to Atlanta tonight, with state banking regulators closing Capitol City Bank & Trust, which had eight locations and $267 million in deposits. North Carolina-based First-Citizens Bank & Trust is taking over the deposits and purchasing the assets.

Thursday, February 12, 2015

“Please, not in front of the TV”: Some voice-control TVs, we found out, are relaying everything said in the room to a unknown data center; that’s where the spoken words get converted to TV commands, which are then relayed back to the TV. Some of the same TVs recognize the video tapes you are playing, and are capable of showing advertising selected to go with the corresponding movies. We found this out when TVs in two countries accidentally started to play commercials over people’s prerecorded programs. The total U.S. TV audience is declining a little faster than last year. A small fraction of former TV viewers are switching to movie subscription services such as Netflix. Jon Stewart will be leaving The Daily Show later this year. A “serious” newscaster is suspended after worries that several stories from the past were fabricated.

The decline of TV is not exactly snowballing, but it has reached the point where every time a TV show ends, you have to wonder how many TV viewers cancel their subscriptions the next day or the next week. In the case of Jon Stewart’s exit, the number will probably be a few thousand. There are millions of viewers whose regular TV habit has been reduced to a single show. Every TV show ends eventually, and when it does, a fraction of those screens will go dark. Part of the reason, I think, is that the TV industry has gotten too slick at the way it controls viewers’ behavior. If they have pushed the envelope too far, it’s no surprise if viewers feel that they’re not getting what they want anymore and are walking away.

Tuesday, February 10, 2015

There is plenty of press attention for Apple’s billion-dollar solar facility deal announced today, and Apple CEO Tim Cook rightly commented that now is the right time for action on atmospheric carbon, which is the cause of climate change. An important detail was lost in the story, however: how much money Apple will save by having its own dedicated electric source. The company has to buy electricity anyway, and in this deal it is buying wholesale and paying cash, pretty much what it likes to do in general. This will save Apple a small fortune in electric bills, particularly as the cost of energy from ordinary commercial sources goes up over time.

Apple can make a deal like this because it has the cash to spend. Other investors who have cash and are wondering what to do with it may want to follow Apple’s example.

Sunday, February 8, 2015

Insurance is supposed to make you feel more secure, but it is having the opposite effect this week after a data leak at one of the largest insurance companies in the United States. The Anthem data leak affects around 80 million customers, which makes it sound similar in size to the 2014 JPMorgan address book data leak. In truth, the Anthem data leak is far more serious. The leaked data included not just names and addresses, but dates of birth and Social Security numbers. For most customers, the leak also included information about employment history and the identity of immediate relatives. Now your confidential personal information is in a criminal organization’s data warehouse in China — or at least, that is investigators’ best guess as to where all that data went. Feeling secure yet?

The insurance industry is a large soft target for criminals wanting to steal personal data. Its information technology is a generation behind the technology that you find in retail and banking, two of the more obvious targets. Anthem in a statement said it had state-of-the-art information security technology, and that is surely true, but that wasn’t the technology that gave way when intruders broke in and started poking around. Anthem’s statement is like boasting about the burglar alarms on your windows while you leave your doors unlocked. But Anthem is one of the largest and wealthiest insurance companies ever. There are hundreds of insurance companies that couldn’t afford the kind of technology that Anthem has. Many, I feel sure, don’t have the capacity to tell when outsiders have broken in to their data. That means the number of insurance company data breaches is fundamentally unknown.

There are other large soft data targets that I hope are already thinking about how they van bring their technology up to the level of retail, at least. You might think of schools and hospitals, but what about government tax and licensing authorities? Many of these government agencies operate on equipment so old they would actually save money if they could upgrade to an off-the-shelf retail-style system.

Pundits agree that we will see many more of these large data leaks. It is inevitable just because of flaws in management culture. I describe it as management by failure: the strategy is to wait until you see something break, and only then take a close look at what could go wrong.

“Management by failure” sounds like a mistake, but I am not sure it is. The typical large business enterprise is so complex, awkward, and unwieldy that senior managers couldn’t possibly keep track of the essential operational details. What else would you want managers to focus on but the most pressing problems that have the potential to bring down the company? And so, these large data leaks and other similar failures are perhaps just the price we pay for doing business with such large and ultimately unmanageable businesses.

Friday, February 6, 2015

Could a cascade of international bank failures start in Russia or Greece?

There is concern in Europe about these two countries on the edge of the continent — Russia because the country has put the financial condition of its central government at risk in a desperate bid to keep its entire banking system standing, and Greece as it attempts to renegotiate the terms of its international bailout while large blocks of sovereign debt are held by the largest banks there.

The ripples of a banking system collapse in Russia or Greece would not reach far, however. Neither country is enough of an economic heavyweight to make much of a dent on Europe as a whole. In Greece less than half of the banking system is at risk of insolvency if Europe cuts loose Greece’s web of bridge loans. In Russia the central government has some experience in replacing failed industries. The Wall Street hedge funds that have bet heavily on Greece might go under, but this would barely be noticed by anyone not owning those shares; the two or three banks in Vienna that would take a hit in the event of a total banking collapse in Russia could be propped up with only a touch of support from outside that country.

Large depositors, though, have reason to worry, and deposit flight from the more troubled banks in the coming weeks is something to watch for.

Thursday, February 5, 2015

The story floating around about Radio Shack’s bankruptcy plans didn’t quite make sense. What would Sprint want with another 1,000 stores? And why would Radio Shack shut down completely? The latest word, that Sprint will occupy only about a third of each store, with Radio Shack merchandise in the rest of the store, makes more sense.

Radio Shack filed for bankruptcy late today, and while all the details have not been worked out yet, it looks like one third to one half of Radio Shack stores will stay open. Most of the rest could close, though there are a few caveats. Radio Shack’s franchise locations, almost 1,000 of them, are not part of the bankruptcy and will stay open.

There continue to be reports that Amazon could end up with a few hundred of Radio Shack’s stores. There are several ways that could happen, and Amazon is probably still working on its plans.

The commentators who were ready to pound nails in Radio Shack’s coffin were not too far off. Radio Shack is obviously overextended, and it may end up with barely a third of the footprint it had a couple of years ago.

It’s a move that comes barely a year after Office Depot bought OfficeMax, so now the three large-format U.S. office supply chains will collapse into one — albeit a smaller chain and one that has a good chance of surviving. Consolidation is one of the surest measures of a declining sector, but you didn’t need consolidation to discover that office supplies were a declining category. With more computer documents viewed on-screen and fewer printed, there is not much need for paper, ink, and the related supplies that define the office-supply category. All three chains were in the process of closing stores, and that is a process that will have to continue.

Tuesday, February 3, 2015

Bombfell is a sign of the time, I think. It’s a clothing subscription service that promises to save men most of the trouble and aggravation of shopping for clothes. I can’t mention Bombfell without a few caveats: at a price near $69 per item or $5,000 per year, it’s not for submillionaires; customers still have to try on all the clothing, so the promised time-saving is mostly an illusion; the range of styles is strictly inside-the-box. Still, an entire business built on the suggestion that you can avoid the inconvenience of clothes shopping is a measure of our collective time pressure.

This is, of course, a first world problem. “How am I supposed to find the time to go shopping for clothes?” is not a question that would easily occur to most of the people in the world, for whom just having clothing that fits and is not torn or stained is a mark of success in that department. Just the thought that you need new clothing every month is a cultural mistake that results in heaps of clothing being donated to charity while still in new condition. A better answer for most people who don’t have time to shop for clothing for a couple of years is to wear the clothes that are already in the closet. That, you may recall, became a fashion trend in 2009, much to the consternation of the fashion industry. That was more from financial pressure than from time pressure, but the effect is the same. There is no telling how many people have stuck with the no-new-clothing strategy for six years, since it takes longer than that for a closet full of clothes to start to look shabby. To sum this all up, if you really wanted to be practical, you wouldn’t be shopping for clothes quite so much, and it does seem as if shoppers are cutting back.

The failures of a series of fashion retailers this winter even as shoppers have more money to spend also hints that clothes shopping is wearing on us. Perhaps fashion has become too subtle or too complicated. Perhaps the tight link between clothes and success has been lost to other categories: food, exercise, mobile devices. Perhaps the decline of the department stores has left clothing retail adrift without an anchor. Whatever the reason, clothing does not seem to be winning our attention in quite the same way it did in the past.

Monday, February 2, 2015

Four years later, the Japanese government is trying to get people to return to Fukushima in spite of the elevated levels of radiation that linger throughout the area. The cornerstone of this effort is a planned robot development zone with associated tax incentives. It is fitting in a way, since robots might help with the reconstruction effort over the next decade, and new advances in robots will be needed to ultimately disassemble the damaged nuclear reactors. The story today at The Asahi Shimbun:

The previously optimistic timetables for decommissioning the reactors have been set aside, and the operator is having difficulty meeting even the more pragmatic plans. It is two months behind in clearing contaminated water from onsite storage after a series of minor glitches, the kind that can be expected in any industrial operation. The contaminated water poses such a risk that the heavier work of taking the reactor facilities apart can’t begin for the time being. In such perilous work, it is safer to go slow and hope for the best than to rush ahead and suffer the inevitable errors that would result. The central government acknowledges now that work on the reactors will take at least until 2040. That is the kind of time scale that nuclear industry observers had been talking about all along.